A crises of legitimacy

As someone who has watched with astonishment the scams the moneychangers are able to pull off—year in and year out—I keep wondering how long it will take for the rest of us to wake up and demand change.  Then the realization reasserts itself that the moneychangers have been scamming the rest of us for most of recorded history and have been getting away with it because of human characteristics that are remarkably easy to exploit.

1) The nature of money is just complex enough so that the effort required to understand it is beyond the efforts that most folks are willing to put out to deal with an abstraction.

2) People want to believe that there is a magic that makes money grow on its own and that there are specialists who know how to manage this process.  All the moneychangers have to say is "don't look too closely or the magic stops" and the necessary rigorous regulation of the process can be thwarted.

But every once in awhile—like now—the moneychangers mismanage the economy so badly they trigger a crises of legitimacy.  Folks stop believing in their magic.  All the trappings of money power—the hushed-toned high-ceilinged bank offices, the shiny shoes, the armies of corrupted academics, the lobbyists and the politicians they buy—will not stop someone from pointing out that the moneychangers are nothing more than greedy vandals or "vampire squids."  The power of their "magic" can be unmasked by a child pointing out that the Masters of the Universe have no clothes.

The question then arises—What happens next?  The legitimate services provided by the financial community may only be a tiny, tiny percentage of what they do, but these services are are amazingly useful and need to continue.  So either governments rise up and impose controls on the moneychangers to limit what they do to the necessary services, or groupings come together to create alternative institutions like credit unions to replace the vandals.

So now that the banksters, along with their bought and paid for politicians and academics, have destroyed their own reputations to the point where most decent people want them jailed or eliminated, the time for counter-proposals on how to organize an economy has come.  Yet while there is enough anger out there to trigger riots, the new economic agendas are not yet being advanced.  Perhaps too many people still want to believe in magic.

Out of Control
The Destructive Power of the Financial Markets
08/22/2011 

Speculators are betting against the euro, banks are taking incalculable risks and the markets are in turmoil. Three years after the Lehman Brothers bankruptcy, the financial industry has become a threat to the global economy again. Governments missed the chance to regulate the industry, and another crash is just a matter of time. By SPIEGEL Staff.

The enemy looks friendly and unpretentious. With his scuffed shoes and thinning gray hair, John Taylor resembles an elderly sociology professor. Books line the dark, floor-to-ceiling wooden shelves in his office in Manhattan, alongside a bust of Theodore Roosevelt and an antique telescope.

Taylor is the chairman and CEO of FX Concepts, a hedge fund that specializes in currency speculation. It's the largest hedge fund of its kind worldwide, which is why Taylor is held partly responsible for the crash of the euro. Critics accuse Taylor and others like him of having exacerbated the government crisis in Greece and accelerated the collapse in Ireland.

People like Taylor are "like a pack of wolves" that seeks to tear entire countries to pieces, said Swedish Finance Minister Anders Borg. For that reason, they should be fought "without mercy," French President Nicolas Sarkozy raged. Andrew Cuomo, the former attorney general and current governor of New York, once likened short-sellers to "looters after a hurricane." 

The German tabloid newspaper Bild sharply criticized Taylor on its website, writing: "This man is betting against the euro." If that is what he is doing, he is certainly successful. While Greece is threatened with bankruptcy, Taylor is listed among the world's 25 highest-paid hedge fund managers. 

A well-read man, Taylor likes to philosophize about the Congress of Vienna and the Treaties of Rome. But is this man really out to speculate the euro to death? And does he have Greece on his conscience? 

Taylor grimaces and sighs. He was expecting these questions. "The big problem is that in some cases these politicians are looking for the easy way out and want to blame somebody else and say speculators are taking Europe apart, taking the euro down and ruining the prosperity of our country," he says, characterizing such charges against hedge fund managers as "nonsense." "My capital isn't the capital of the Rothschilds," he says, insisting that he is working with the "capital of the people," and that his goal is to protect and increase this capital. Taylor points out that no one from any of the German pension funds that invest their money with him has ever called him on the phone to tell him not to bet against the euro. 

Markets Control Politicians 

Taylor's arguments echo those of everyone in the financial industry -- the executives, the bankers and the big fund managers. They all insist that they are not responsible for the crisis in the euro zone and the turbulence in the financial markets, and that their actions are purely rational and in the interest of their investors. 

The truth is that the financial markets are controlling the politicians. If Sarkozy interrupts his vacation, the markets interpret his sudden return as a sign that the situation there is worse than they thought -- and promptly set their sights on the country. And if there is an argument between Italian Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti, then the markets target Italy, because they doubt that the Italian government is serious about introducing austerity measures. The markets take advantage of every weakness and every rumor to speculate against one country after the next. 

In doing so, they aggravate the crisis. Once a country has become the subject of rumors and speculation, other investors become nervous. Fearing further price declines, pension funds and insurance companies also start selling stocks and bonds. In the end, fear nurtures fear and a panic ensues. more

When Will the Walls of the Central Banks Fall?
The Cult of Incompetent Bankers
By DEAN BAKER   August 23, 2011 

The world financial system had another serious scare last week. The immediate issue was the prospect that the euro could break up. With the debt crisis spreading from smaller countries such as Greece and Ireland to the eurozone giants of Spain and Italy, events were again getting scary. 

A default by the smaller countries would create serious disruptions throughout the eurozone and the larger world economy, but no one doubts that these could be contained. The European Financial Stabilization Fund (EFSB) is large enough to paper over the mess that would be created by the default of Greece or Ireland. 

However the default of Spain or Italy is an entirely different matter. If either country were to default, the repercussions would be enormous, dwarfing the resources of the EFSB. A default would almost certainly make several major European banks insolvent and lead to the sort of freeze-up of the financial system that we saw after the bankruptcy of Lehman in September of 2008. With the interest rate on Italian and Spanish debt soaring, the financial markets had to take this risk seriously. 

The European Central Bank (ECB) rose to the immediate challenge, buying up large amounts of both governments' debt and committing itself to buy more if necessary. This re-established confidence in the market and for the moment at least seems to have brought the crisis under control. Still, it is unlikely that anyone would bet that Europe and the world are through with this set of problems and for this the ECB bears an enormous amount of blame. 

Just to be clear, this whole crisis came about because central banks did not take seriously their responsibility for maintaining the stability of the overall economy. They held the view that as long as the inflation rate was low and steady then everything else would take care of itself. 

In the United States this meant ignoring the growth of an $8 trillion housing bubble, even though this bubble had clearly become the motor of the economy with near-record rates of construction and a housing equity driven consumption boom. In Europe, the ECB failed to notice housing bubbles through much of the eurozone, but most notably the ones in Spain and Ireland that were leading to massive borrowing and unsustainable current account deficits. 

However, the Federal Reserve Board has at least been relatively aggressive in responding to the crisis, pushing its overnight lending rate to zero and buying up nearly three trillion dollars in long-term bonds through repeated rounds of quantitative easing. Last week it committed to keeping its overnight lending rate at zero for the next two years. 

By contrast, the ECB seems determined to learn nothing from its past errors. It never lowered its overnight lending rate below 1.0 percent and never pursued quantitative easing as aggressively as the Fed. Even worse, it remains committed to its 2.0 percent inflation target as though nothing in the world had changed since the collapse of the bubble. As a result of this commitment, it has actually been raising interest rates in a deliberate effort to slow the eurozone's economy and dampen inflation. 

This policy is incredible for three reasons. First, Europe has no real inflation problem. The rise in the inflation rate targeted by the ECB comes almost entirely from the rise of the price of oil and other commodities. These price increases are the result of the growth in demand in places like China and India. They have almost nothing to do with growth in Europe and will not be reversed by a tighter ECB policy. more

Bloomberg reveals massive corruption in the private Federal Reserve 

By Madison Ruppert   Aug 22. 2011
Editor of End the Lie

When the mainstream media is reporting stories like this, you know it is so serious that it cannot be ignored, even if they wanted to.

Today Bloomberg has revealed that the “Wall Street Aristocracy” received a staggering $1.2 trillion in loans. Yes, you read that right: $1.2 trillion.

The private Federal Reserve calls these hand-outs to their corporate cronies “emergency loans” but in reality they are nothing more than friends giving friends unfathomable amounts of money in order to “keep the economy from plunging into depression”.

Of course Federal Reserve Chairman Ben Bernanke and Bloomberg opt to characterize the giveaway of public funds as legitimate “unprecedented efforts” to help our withering economy, when this is far from the case as we have seen from the entire “stimulus” package that has just driven American deeper into the black hole of debt.

If Bernanke actually cared one iota about getting the American economy back on track, he would have given the money to the people of the United States.

This $1.2 trillion would be able to cover almost the entire 6.5 million delinquent and foreclosed mortgages of struggling American citizens. Instead, and not at all surprisingly, Bernanke and the Fed opted instead to give the money to their buddies.

The preponderance of the funds went to Morgan Stanley, who received $107.3 billion. Second was Citigroup, receiving $99.5 billion, and third was Bank of America who received $91.4 billion, according to information obtained via FOIA requests, months of litigation, and an act of Congress on behalf of Bloomberg.

Nearly half of the Federal Reserve’s top 30 borrowers as measured by peak balances were not American. A disturbing amount of money, which was given with American citizens as collateral, went directly to offshore European banks.

The Royal Bank of Scotland in Edinburgh received $84.5 billion, UBS AG out of Zurich got $77.2 billion, German Hypo Real Estate Holding AG received $28.7 billion. Bloomberg reports that this equals an average of $21 million for every single one of Hypo Real Estate Holding’s 1,366 employees.

Bloomberg reveals a quite disturbing reality in the following paragraph:

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg. more

Looting with the lights on
We keep hearing England's riots weren't political – but looters know that their elites have been committing daylight robbery

Naomi Klein
guardian.co.uk,  Wednesday 17 August 2011

I keep hearing comparisons between the London riots and riots in other European cities – window-smashing in Athens or car bonfires in Paris. And there are parallels, to be sure: a spark set by police violence, a generation that feels forgotten. 

But those events were marked by mass destruction; the looting was minor. There have, however, been other mass lootings in recent years, and perhaps we should talk about them too. There was Baghdad in the aftermath of the US invasion – a frenzy of arson and looting that emptied libraries and museums. The factories got hit too. In 2004 I visited one that used to make refrigerators. Its workers had stripped it of everything valuable, then torched it so thoroughly that the warehouse was a sculpture of buckled sheet metal. 

Back then the people on cable news thought looting was highly political. They said this is what happens when a regime has no legitimacy in the eyes of the people. After watching for so long as Saddam Hussein and his sons helped themselves to whatever and whomever they wanted, many regular Iraqis felt they had earned the right to take a few things for themselves. But London isn't Baghdad, and the British prime minister, David Cameron, is hardly Saddam, so surely there is nothing to learn there. 

How about a democratic example then? Argentina, circa 2001. The economy was in freefall and thousands of people living in rough neighbourhoods (which had been thriving manufacturing zones before the neoliberal era) stormed foreign-owned superstores. They came out pushing shopping carts overflowing with the goods they could no longer afford – clothes, electronics, meat. The government called a "state of siege" to restore order; the people didn't like that and overthrew the government. 

Argentina's mass looting was called el saqueo – the sacking. That was politically significant because it was the very same word used to describe what that country's elites had done by selling off the country's national assets in flagrantly corrupt privatisation deals, hiding their money offshore, then passing on the bill to the people with a brutal austerity package. Argentines understood that the saqueo of the shopping centres would not have happened without the bigger saqueo of the country, and that the real gangsters were the ones in charge. But England is not Latin America, and its riots are not political, or so we keep hearing. They are just about lawless kids taking advantage of a situation to take what isn't theirs. And British society, Cameron tells us, abhors that kind of behaviour. 

This is said in all seriousness. As if the massive bank bailouts never happened, followed by the defiant record bonuses. Followed by the emergency G8 and G20 meetings, when the leaders decided, collectively, not to do anything to punish the bankers for any of this, nor to do anything serious to prevent a similar crisis from happening again. Instead they would all go home to their respective countries and force sacrifices on the most vulnerable. They would do this by firing public sector workers, scapegoating teachers, closing libraries, upping tuition fees, rolling back union contracts, creating rush privatisations of public assets and decreasing pensions – mix the cocktail for where you live. 

And who is on television lecturing about the need to give up these "entitlements"? The bankers and hedge-fund managers, of course.
This is the global saqueo, a time of great taking. Fuelled by a pathological sense of entitlement, this looting has all been done with the lights on, as if there was nothing at all to hide. There are some nagging fears, however. In early July, the Wall Street Journal, citing a new poll, reported that 94% of millionaires were afraid of "violence in the streets". This, it turns out, was a reasonable fear. more

Germany calls for Europe-wide short-selling ban 

Germany wants to see short-selling gone for good  12.08.2011

The trading strategy known as short-selling came into sharp focus Friday as four eurozone nations placed short-term bans on the practice. EU economic heavyweight Germany has called for its complete prohibition.

Germany called for a Europe-wide ban on short-selling Friday after four EU partners took the step of prohibiting the trading strategy in a bid to contain the eurozone debt crisis and calm jittery markets. 

"The German government has been monitoring the problem of short-selling for some time and thus banned naked short-selling in Germany last year," said a spokesman for the Finance Ministry. "In addition, we are calling for a broad short-selling ban in Europe." 

Short-selling is the practice of borrowing shares you do not own and selling them when their price is high on the assumption that the share value will drop. The same quantity of shares is then repurchased at a lower price and the difference is banked. 

This form of profiteering on market losses can give the impression of a mass sell-off of shares, hence driving down their worth and fuelling market instability. France, Italy, Belgium and Spain all put a hold on the trading method Friday as it pertains to stocks in a collection of banks and large insurers. 

'Abusive' short selling 

Shares in banks and other large institutions, notably insurers, have fluctuated wildly in recent weeks on the back of the eurozone debt crisis emanating from countries such as Greece, Italy, Portugal and Ireland. It's believed short-selling may have added to instability. 

The European Securities and Markets Authority (ESMA) said restricting the "abusive use of short-selling" was "an effective tool to calm the market." 

"They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets," ESMA said in a statement on its website. 

"These measures have been aligned as far as possible in the absence of a common EU legal framework in the area of short-selling and given the very different national legal bases on which such measures can be taken." 

However, critics point out that a similar ban in the US was not effective. Several academic studies showed that while share borrowing fell during the three-week ban, financial stocks continued to plummet. more

When a long-serving bankster like Roach brings up the concept of Jubilee, you just KNOW the jig is up for the untrammeled greed of the moneychangers.

Stephen Roach: Consumers need debt jubilee

EDWARD HARRISON | 22 AUGUST 2011

The over-indebted American consumer will be hard pressed to simultaneously reduce debt and maintain levels of consumption that support economic growth. On CNBC today, Stephen Roach of Morgan Stanley says, we need “ways to forgive the excesses of mortgage, installment and revolving credit, as what was done in the 1930s, that will help consumers get through the pain of deleveraging sooner rather than later.” 

There are four ways to reduce real debt burdens:

1. by paying down debts via accumulated savings.
2. by inflating away the value of money.
3. by reneging in part or full on the promise to repay by defaulting
4. by reneging in part on the promise to repay through debt forgiveness

Listening to Roach explain the conundrum of high unemployment and poor wage gains, juxtaposed with high debt, it is clear he recognizes there is zero chance that consumers will be able to support the kind of economic growth via deleveraging and accumulating savings that avoids a deflationary outcome. The macro backdrop for consumers is deflationary. 

Central banks or fiscal agents might attempt to reduce the real burden of debt. Look at the UK where financial repression is the most advanced in the developed economies and the Bank of England has missed its inflation target time and again. The consumer there is in a world of pain. UK household finances are 'worse than during height of recession'. 

However, if we see another recession before the deleveraging is complete - as is my base case - deflation is going to be all around us, increasing the real burden of debt. In my view high levels of default or debt forgiveness are likely going forward in the US, Ireland, the UK, and Spain at a minimum. more

The Roach video is below.